Are you using an Offset Account to your best advantage?

Australians with a mortgage are increasingly turning towards offset accounts, not only to save money on their loans, but to better manage their finances.

Your home loan is probably the biggest financial commitment you'll make in your lifetime. So what if there was a way to reduce the amount it costs – the interest you pay – and also pay it off sooner?

There is, it's called an offset account, and it could save you thousands of dollars if you use it correctly.

It's really very simple. An offset account is a transaction or everyday banking account that is linked to your home loan. Every dollar you have in that account 'offsets' the balance of your loan – reducing the amount of interest you pay every month. Because these savings add up over time, you can also use this 'extra' money to pay your loan off faster.

Many home loans in Australia have an offset account but they are usually only available with a variable rate home loan.

Because your home loan interest rate is likely to be higher than the rate on your savings account, and you'll pay income tax on the interest you earn, putting your extra funds into an offset makes much more sense.

If you can get a debit card with your offset and online access to payments, why not use it as your default transaction account and tell your employer to make salary payments into the offset account? Every dollar helps as, like your home loan, interest is calculated daily on your offset account, so even if the balance goes up and down with your day to day transactions, you'll still be ahead.

Combine your offset with credit card payments

The more money you can keep in your offset, and the longer you keep it there, the more you will save. So if you are really disciplined, you could use a credit card to defer everyday expenses by being clever with the interest free payment period. The trick with this tactic is to always pay the full balance off when it is due – because the interest on your credit card will be much more than the interest you pay on your home loan.

With an offset account you can:

• reduce the interest you pay over the life of your loan

• transfer money and make payments online

• get a debit card for ATM withdrawals and store payments.

What should you look for in an offset account?

Not all offset accounts are the same, so make sure you check the details. Look for:

• a 100 per cent (full) offset account, rather than a partial offset (most offsets are 100 per cent now)

• easy access to your offset funds

• no balance limit or penalties for withdrawal.

Some banks offer multiple offset accounts linked to one loan, which can help if you're saving for a few big things (like another property, a holiday, a wedding or a new car)

What's the difference between an offset account and a redraw facility?

A Redraw facility also helps reduce the interest on your varibale home loan by allowing for extra payments that you have access to when you need it. You'll effectively save the same amount as with an offset, but sometimes there are restrictions on redraw and you may not have as immediate access to your savings. In some cases this can be a good thing. You'll also be increasing your equity in the home, because you're paying off the principal.

Many home loans offer both Redraw and Offset. But when it comes to saving as much as you can on your home loan, the most important thing you can do is use them effectively.

Our experienced team is here to help you navigate the maze of home loan options, we'd love to talks to you about the loan that best suits you and your circumstances and we'd love to share the proven ways to help pay it off earlier. Call Jaeneen on 0402 684 199 to discuss your lending requirements.